8 Ways Blockchain Technology Can Transform Banking

It is no secret that blockchain technology has garnered significant recognition worldwide. According to Statista, global spending on blockchain solutions is expected to reach around $11.7 billion by 2022 [1]. Global spending on blockchain solutions was less than $1 billion six years ago. Pretty impressive right?

Over the past few years, interest in blockchain technology has accelerated rapidly, especially in developed countries. Many proponents of blockchain technology believe that the technology has the potential to transform healthcare, supply chain management and banking. While that may be true, blockchain has yet to live up to expectations. That said, things are moving in a positive direction, especially in the US and UK.

Governments across different parts of the world are increasingly warming to blockchain technology. Thus, there could not be a better time to understand and explore the scope of blockchain in various industries. Today we will shed light on the potential impact of blockchain on banking and whether it has what it takes to disrupt the global banking sector.

Without wasting much time, let’s dive right in.

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Blockchain technology in banking – how do the banks react?

While the traditional banks ignored the early alarm bells, they cannot escape from the blockchain anymore. In fact, many notable banks have taken note of the technology and also found new ways to infuse this innovation into age-old banking practices.

Here are a few banking institutions that have expressed interest in blockchain and are also pursuing opportunities to work with it.

• BNP Paribas, the popular French investment bank, was among the first institutions to explore the possibility of using blockchain technology for order processing and more.
• JP Morgan is another well-known financial entity taking proactive steps to adopt blockchain, attracting deals worth around $300 billion.
• NASDAQ, Inc., the technology-focused exchange, is implementing blockchain to minimize time, cost and friction points across capital markets.
• Banco Santander (SAN), a company headquartered in Spain, is working internally to create blockchain-based solutions that will reduce costs by $20 billion annually by the end of the decade.
• Blockchain technology is seen as “transformative” by Barclays ( BCS ), which is experimenting with it both internally and through partnerships with financial services start-ups.
• UBS, the Swiss investment bank, has taken things up a notch. According to reports, UBS is creating its own standalone blockchain lab to conduct proprietary research on the company.
• According to data released, Citigroup Inc. (C) has been working on at least three separate blockchain-based projects, including CitiCoin, its own cryptocurrency.

Looking at these examples, it is very clear that blockchain in banking is becoming increasingly popular. This development is a testimony that the banks are willing to work with blockchain, paving the way for better and improved banking experiences for customers all over the world.

Blockchain technology in banking – what can we expect?

Going forward, we expect many financial services companies to work with regulators to create a clear path for blockchain technology to flourish. In addition, we also expect to see general progress in standardized solutions that will help the financial sector reap the benefits of blockchain technology.

In this section, we will talk about how blockchain can disrupt the different areas of banking in the coming years.

1. Person-to-person money transfer

We live in an age where digital technologies have taken over various aspects of our lives. Who would have thought sending money at the touch of a button would be possible a couple of decades ago? Today, sending and receiving money is easier than ever thanks to person-to-person money transfer platforms, including Google Pay, PayPal, Wise, Revolut and more. Almost 108.9 million people in the US alone use money transfer applications [2].

While the popularity of such applications continues to increase, there are a few drawbacks. For example, many applications are only functional in a specific region or country, preventing users from other geographies from sending or receiving money. While there are applications like PayPal that solve this problem, blockchain could prove to be a game-changer in this regard as there are no geographical restrictions. Cryptocurrencies are widely used to make person-to-person transactions worldwide. However, one must know the exchange rates and also understand that one can lose some money during this process.

2. Blockchain in banking for international money transfers

Many banks are now using blockchain more extensively to make international money transactions. This is because using blockchain is significantly more cost-effective than using conventional techniques. How cheap is it? In contrast, the fixed costs associated with traditional methods such as Western Union, Swift etc. can vary from 5 to 20% of the total amount. However, the overhead costs associated with blockchain fluctuate between 1-3%.

Another advantage of blockchain is that foreign payments do not need any third-party authorization, which significantly accelerates the process compared to conventional money transfer techniques.

3. Account deposits and balances

Here is an interesting piece of information you should know as a customer. We are all aware that customers turn to banks to deposit money into either a current or savings account. However, it is important to understand what happens to your money after you make a deposit.

In most cases, the banks lend the deposited money through fractional reserve banking. Therefore, the balance shown on your account when you check your balance is not held by the bank.

In reality, a bank run occurs when too many customers try to withdraw their money at the same time, but there is not enough money to distribute. Therefore, a bank account balance is essentially an accounting entry.

However, blockchain technology in banks can help us overcome this problem. A blockchain is a ledger that records accounting transactions. Consequently, bank accounts may eventually be represented on blockchains, making them more accessible, secure and affordable to maintain.

4. Secondary market trading

Clearing and settlement of agreements is necessary for everything from the simplest purchase of the company’s shares to the most complicated over-the-counter currency swap. It is mandatory to have verifiable transfer of ownership and registration of the asset or contract being transferred. Exchange fees and clearing fees are now included in the price of each trade and, given the order volume, can grow significantly.

All types of asset classes, including stocks, bonds, derivatives, commodities and real estate, would experience a significant reduction in transaction costs and clearing costs if the ownership of shares could exist on a blockchain and any change in ownership could be instantly validated and confirmed.

5. Online verification and identification

No financial transaction can be completed online without establishing an online identity and foolproof authentication. This applies to any service provider a customer can choose within the banking and finance sector. Blockchain can centralize the electronic identity verification process, allowing people to share their identity with whichever service provider they choose after authenticating it once using the blockchain.

Users can also choose from different identity verification techniques, including user authentication, facial recognition, and so on.

6. Blockchain in banking to offer credit reports

How do people secure loans? They must have a good credit score and a credit report to back it up. Only then is a bank likely to sanction a loan. Also, many third-party credit companies offer credit reports to medium and large businesses. However, the services of such third-party companies are largely limited to medium and large businesses, leaving individuals and smaller businesses in a quandary. How can you ask?

It usually takes some time for banks to evaluate a credit report before approving a loan agreement. This is where blockchain in the banking sector can help. This innovative technology accelerates and streamlines the entire process. In addition, blockchain can also ensure that credit reports are transparent, error-free and easily shared with banks.

7. Track transactions

Blockchain is also very beneficial in transaction tracking, which is an important aspect of banking. Banks and financial institutions can use blockchain technology to build a centralized, highly secure common registry of transactions. There would be no data duplication and there is less risk of forgery due to the central availability of all transactions. Blockchain, according to some banking experts, is useful in specialized fields, including interbank transfers, but is not well suited to consolidating many transactions.

8. Crowdfunding measures with blockchain

Many people use crowdfunding to start new businesses and for other purposes. This involves asking for donations from the public online or offering shares in the company in return. Many companies can use blockchain technology to offer Initial Coin Offerings, which are the crypto equivalent of Initial Public Offerings for businesses. However, one disadvantage of initial coin offerings is that they are extremely risky due to the lack of regulations and laws surrounding this subject.

Parting notes – blockchain has potential, banks should not ignore it

As seen in this article, blockchain has the potential to transform one of the oldest traditional sectors in the world. However, for that to happen, public sector organizations and financial technology (Fintech) experts must come together to ensure the seamless use of blockchain technology.

That said, there is a lot of work that needs to be done to protect consumers and raise awareness related to blockchain, and the risks associated with this new technology.

For now, all we can do is wait and see if blockchain in banking will gain mainstream recognition or it will cement a place in a few specific areas of banking.

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Keep reading iTMunch to read similar articles about blockchain, cryptocurrency and other innovative technologies.

Feature image source: Image by Maicon Fonseca Zanco from Pixabay

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Sources:

[1] (2019) “Global spending on blockchain solutions from 2016 to 2022, by region” Statista [online] Available from: [accessed December 2022]

[2] (2022) “22 Mobile Payments Statistics That Outline the Industry’s Growth” MoneyTransfers.com [online] Available from: [accessed December 2022]